Today’s REI Classroom Lesson

Today, Nav Athwal goes over how crowdfunding works for investors needing to borrow capital.

REI Classroom Summary

From the initial application to getting approved, closing the deal, and funding, find out how the crowdfunding process works.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Nav: Hello, and thank you for joining us for the REI Classroom. My name is Nav Athwal. I’m the founder and CEO of RealtyShares.com. Today, we’re going to tell you a little bit about how crowdfunding for real estate works, the process to get a loan through this new mechanism, this new innovation called crowdfunding.

Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com.

Nav: Again, I’m very passionate about this topic myself because I do run a crowdfunding for real estate platform where I’ve seen the process work for over 250 different assets that we funded through the platform. So very excited to talk about a topic that’s very near and dear to my heart.

So if you’re a borrower, once you have a property in your contract, you’re typically then trying to arrange your financing. You may go to a conventional bank, you may think about a hard money lender, and now there’s this new innovation called crowdfunding where you can get capital in a much faster, more efficient way than you can with the bank and typically at rates that are going to be cheaper than hard money, just based on the efficiencies that crowdfunding does create.

So the process really works with an online application process. You’re a borrower, again, you have a property under contract and you’re ready to get your loans, so you fill out a short application. We have a short one at RealtyShares.com that you can take as little as a minute to complete.

Once that application is submitted and you submit some general information about yourself, your track record, and the property you’re looking to fund, then you’ll be given a price for the loan. You’ll typically be given how many points you’re going to be charged at origination, as well as the interest rate at which you’ll be paying your loan back at.

Most of the loans that you see through crowdfunding today are short term loans, 6 or 12-month duration loans. So you’ll see the rates that are typically going to be the 9 to 11% range. So it’s still cheaper than hard money, but definitely not as cheap as conventional financing. But again, you’re filling a need that conventional banks aren’t providing, which is short-term bridge loans.

Once you’re pre-qualified and you’re given your interest rate in points, then you’re given the option to proceed with the application at the agreed upon pricing, and submit additional documents such as an appraisal, your information, so that a credit and background check can be conducted. Any other information you may have on the property, like a purchase contract or a title report, that information is then reviewed by the crowdfunding platform. Typically, it can take anywhere from one to three business days to get that process fully reviewed and get your loan approved.

After which, you’ll be issued a LOI or pre-approval letter, so you’ll know that the loan and terms are moving forward, and you can expect to close usually within 7 to 10 days after that. So once the approval letter is signed, your property is then listed on the crowdfunding platform. If you’ve ever funded something through the Kickstarter or Indiegogo, you probably know what that process looks like.

Your deal will be listed on the platform, and then investors that want access to your deal, like the deal, like the borrower, like the return profile, are able to invest small amounts in that loan through usually an LLC or other special purpose vehicle.

The investment minimums can be as low as a thousand, but it’ll see it as high as 5,000. So you’ll aggregate a lot of investors that want to fund your loan. That funding process, again on our platform RealtyShares, it’s probably consistent throughout the industry. It can take anywhere from one day up to three to four days.

After the funding is complete, then you do your typical closing process. You have an escrow or title company that will handle issuing the title policy for the lender and the owner, making sure the funds are wired in to close the loan, as well as making sure the loan docs are signed and recorded, which will typically include a promissory note, a deed of trust, as well as a personal guarantee if applicable.

All in with the crowdfunding process from start to finish, from that pre-approval application to truly having money in the bank account to buy the loan or the escrow, is going to take anywhere from 10 to 14 days. So very fast, very efficient process, and you’re able to get capital, again usually at 200 to 300 basis points, two to three percent cheaper than your local hard money lender.

So that’s a little bit about how crowdfunding your next loan works. Very excited to tell you a bit more, and I’ll see you next time.

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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

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Nav Athwal is the Founder and CEO of RealtyShares. Athwal oversees company planning and strategy, legal, investor fundraising across the platform and deal activity. Nav started his career as an electrical engineer, before transitioning into real estate law. He worked as a Real Estate and Land Use Attorney at Farella Braun & Martel, LLP where he led some of the largest mixed-use, residential commercial and renewable energy real estate projects in California on behalf of clients such as Archstone, AvalonBay, FirstSolar, Equity Residential, Related Companies and SKS Investments.RealtyShares is an online marketplace for real estate investing through which Accredited US Investors can invest as little as $5,000 in residential and commercial real estate properties across the United States. To date, RealtyShares has successfully funded over 150 real estate deals to date. Athwal’s San Francisco Team has grown to 18 members in the last year and the company plans to have 35 employees by the end of 2015. In April, RealtyShares raised $10M in a venture round lead by Menlo Park-based Menlo Ventures with participation from General Catalyst Partners.Athwal is a UC Berkeley lecturer on real estate law, a real estate broker and a second-time entrepreneur. He has been featured on television networks such CNBC and Fox Business and regularly contributes to Forbes.